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SUMMARY:Transaction-cost-aware Factors
DTSTART:20231121T121500
DTEND:20231121T131500
DTSTAMP:20260407T152659Z
UID:c99e7baa1dc9857c57ffb386a205c42c2dd2d1649426c817f17961b5
CATEGORIES:Conferences - Seminars
DESCRIPTION:Federico Baldi Lanfranchi - PhD candidate SFI@EPFL\nThe asset 
 pricing literature identifies hundreds of economic characteristics that ap
 pear to be priced in expected returns. However\, candidate factors are oft
 en oblivious to how investors would optimally trade such signals in the pr
 esence of trading fees. In this paper\, I show that factors constructed wi
 thout taking transaction costs into account have little hope of spanning i
 nvestors' achievable efficient frontier\, which reflects the cost of tradi
 ng. I introduce transaction-cost-aware versions of leading factors in the 
 literature\, assuming that investors trade off the benefits of tracking ch
 aracteristics closely against trading fees incurred in the process. Transa
 ction-cost-aware factors dramatically outperform traditional ones after fe
 es. Models that incorporate transaction-cost-aware factors increase net ma
 ximum squared Sharpe ratios by up to a factor of 3. I further suggest that
  discretionary choices in factor construction can invalidate asset pricing
  inference. Excessively aggressive rebalancing can fully offset the pricin
 g ability of otherwise promising economic characteristics.
LOCATION:UniL Campus\, Room Extra 126
STATUS:CONFIRMED
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